Recent ads from TheStreet.com proclaim that its Action Alerts PLUS service, which features the stock picks of hyperactive CNBC host Jim Cramer, had trounced the market since January 1, 2002. The ads say Cramer’s “portfolio’s total average return has averaged more than DOUBLE the return of the S&P 500 [index] for the same time period.”
The ads were misleading, to put it mildly. Cramer’s service, which carries a sticker price of $475 a year, may, at best, have matched the market since its inception. It’s hard to tell, though, because TheStreet’s disclosures about Cramer’s results are murky. But they serve as a clear reminder that you must scrutinize performance claims before you start following a popular guru’s picks. In particular, watch for:
Outrageous returns. If a newsletter says it made 400% last year, be wary. Even if true, it is inconceivable that the service will repeat that kind of return.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Selective disclosure. A service might tout its great call in avoiding the 2008 debacle, but fail to mention a lousy overall record.
Math games. In a low-return era, even accurate numbers can mislead. If your stock picks returned 2% annualized over a period in which Standard & Poor’s 500-stock index gained 1% a year, you doubled the market. But don’t quit your day job.
Skewed comparisons. Make sure performance is being compared with appropriate benchmarks—and that the benchmarks are properly calculated.
It is in the last category that ads for Cramer’s service fall short. One recent ad included a chart, under the headline “Action Alert PLUS is CRUSHING the S&P 500,” showing that the picks returned about 39% from the portfolio’s inception through last March 31, compared with 15.5% for the S&P 500 over the same nine-year, three-month period. But the S&P figure did not include reinvested dividends. With them, the S&P 500 returned 38.3%.
When I first broached concerns about the ads to Gregory Barton, TheStreet’s general counsel, he said the information represented an “isolated error due to a low-level creative person.” When I pointed out that the data on the Action Alerts PLUS Web site also misrepresented the facts, Barton retracted his mea culpa and sent me an e-mail saying that TheStreet “is not aware of any inaccuracies in the information we disclose.” He added: “We believe it is commonly understood that the S&P 500 is a price-appreciation index that does not include dividends or reflect trading costs.”
He’s right about trading costs, but wrong about the dividends. The Securities and Exchange Commission, for example, requires stock-oriented mutual funds to compare their performance with an index that includes dividends. For large-company domestic stock funds, that index is almost always the S&P 500.
What makes judging Cramer’s performance so hard is that it’s not clear whether he reinvests all of his dividends or just some of them. Barton first told me that Cramer’s service never reinvested dividends. When, based on my research, I contradicted him, he backpedaled and said that Cramer’s service “sometimes” did. (Barton says Cramer has no involvement with AAP’s marketing.)
After I began making my pesky inquiries, TheStreet changed the way it reports the S&P 500’s returns on its Web site. It now shows the change in the S&P 500 plus dividends received, but not reinvested. Those figures are typically lower than the standard S&P 500 total-return numbers. The Web site’s explanation: Because the “dividends are given away to charity annually, they are received in cash, rather than reinvested into the underlying stocks.”
TheStreet, clearly, is still using the numbers it likes to use. The lesson here for investors: Scrutinize performance claims carefully. And don’t be influenced by celebrity or self-promotion.
Columnist Andrew Feinberg writes about the choices and challenges facing individual investors. He does not have a position in TheStreet.com.
-
Collective Investment Trusts: Should Your 401(k) Hold Them?Your employer-sponsored retirement plan may hold a unique type of investment called a collective investment trust, or CIT. They come with benefits and risks that warrant a closer look.
-
How to Plan for Retirement When Only One Spouse WorksWhen you're married but only one spouse works, leaving retirement planning to the working partner puts financial security at risk. A joint effort is vital.
-
Stock Market Today: S&P 500 Tops 6K as Election Rally EnduresThe S&P 500 closed just below the 6,000 mark on Monday.
-
Stock Market Today: S&P 500 Nears 6K in Best Week of the YearOptimism around Donald Trump's election win, the Fed rate cut and consumer sentiment sent markets to new highs Friday.
-
Stock Market Today: Stocks Pause as Investors Assess Fed PolicyThe Federal Reserve met expectations with a quarter-point rate cut.
-
Fed Cuts Rates Again: What the Experts Are SayingFederal Reserve The central bank continued to ease, but a new administration in Washington clouds the outlook for future policy moves.
-
Stock Market Today: Dow Jumps 1,500 Points on Election OutcomeThe removal of election uncertainty unleashed a powerful rally in equity markets.
-
Market Reaction to Election Results: What the Experts Are SayingJobs Report Election uncertainty has been removed from the list of investors' worries, helping equities soar.
-
Stock Market Today: Stocks Rise Amid a Broad-Based Election Day RallyAll 11 sectors closed in the green on Tuesday, and all three major indexes added more than 1%.
-
Stocks Rally on Election Day as Markets Brace for VolatilityAll three major indexes opened higher as voters chose the 47th President of the United States.
